Every industry goes through specific, easily defined stages. The market’s development is followed by exploitation, then consolidation among the players and finally a mature examination of the winners’ value, based first on revenue growth, then earnings.
Along the way, there is drama. And when the product is of questionable legality, drama is going to be plentiful. Drama seems to be the main product of Aphria (NASDAQ:APHA), a small Canadian pot producer.
Aphria went public in May, and by September investors saw a roughly 50% gain on their shares. Then came the short sellers, and a Dec. 3 report from Hindenburg Investment Research, accusing the board of self-dealing in Jamaica and Latin America, and claiming its pot was of inferior quality.
This was followed by an unsolicited takeover attempt and, last month, the resignation of the CEO and co-founder on the heel of disappointing results.
The Drama of Aphria Stock!
Aphria had sales of $21.7 million for the November quarter, which currently supports a market cap of $2.6 billion. that was followed by Citron, usually known as a short-seller, issuing a bullish report on Aphria, noting that it’s one of only three listed pot companies yet to be bought by a big-pockets U.S. partner. Citron has now taken profits from its position in APHA
And now, the company has an unsolicited takeover offer from Green Growth Brands (OTCMKTS:GGBTX) valuing the company at C$2.8 billion. That’s $2.1 billion, well below Aphria’s current market cap.
The two boards haven’t met, Aphria has told shareholders the price is inadequate and they should hold off tendering shares, while Green Growth has formalized its offer, and indicated it might be willing to negotiate a higher price.
The stock, however, is trading well over this takeover price, opening Monday at $10.10 and going up from there.
In the meantime, Aphria stock is facing class action lawsuits, covering its late 2018 swoon. It traded in September as high as $15.49, and as low in in December as $4.85.
Leadership is in flux, with CEO Victor Neufeld and co-founder Cole Cacciavillani having announced their resignations last month. Meanwhile. APHA stock is still trying to convince investors it’s a market leader, transferring cuttings to a Danish partner, Schroll Medical, to get into the European market.
The Reality for APHA
Aphria is a small company in a hit niche that’s in play. If you’re buying it today, you’re speculating that a big-pocketed partner is going to swoop down and take out both Aphria and probably Green Growth, at a spectacular profit.
The most important word in that last sentence is speculating.
No one knows how big the pot market will be, or how fast it will develop. It’s currently divided between buyers who like marijuana to get high and buyers who need it for dealing with serious conditions like the pain of chemotherapy.
Only one company has managed to isolate an active ingredient in marijuana that they can turn into a drug and get approved — GW Pharma (NASDAQ:GWPH) and its cannabidiol-based Epidiolex. Thus you see a lot of pot executives wearing doctors’ gowns while walking through greenhouses that look like something out of Cheech and Chong.
The recreational market, meanwhile, seems to have peaked in Colorado and Washington, where it was first made legal, and while other states are moving toward legalization, we don’t know how big or profitable those markets will be, once they’re regulated.
We also don’t know whether APHA, or its competitors, can supply that demand. Aphria’s Latin American dealings were done to convince the market it could guarantee supply, but the Hindenburg report indicates they may have just made Neufeld and Cacciavillani rich.
Even as a speculation, I feel that Aphria stock is fully valued.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
